Financial Markets Regulatory Outlook 2019

10 years on from the crisis

Our annual assessment from Deloitte’s EMEA Centre for Regulatory Strategy explores how major regulatory trends will shape the financial services industry in the year ahead and provides solutions to guide leaders in effectively navigating the changes.

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Interim Regulatory Outlook 2019

Our Regulatory Outlook (below) set out our view of the FS regulatory world as we entered 2019. Six months on, this update evaluates the key themes that have emerged and looks forward at what’s to come in the remainder of the year. It provides updates on all of our cross-sector themes and supervisory constants, as well as commentary on the major developments across the banking, insurance, capital markets and investment management sectors. Please click on the button on the right to read our Interim Regulatory Outlook for 2019.

Cross-sector themes

Shift from implementing new regulations
to ongoing supervisionView a summary of our predictions for 2019

The focus of activity for supervisors will shift to examining how key regulatory reforms and associated new requirements have been implemented. Implementation of MiFID II is likely to be at the vanguard of this scrutiny, in particular transaction reporting, payment for research and inducements.

Faced with this scrutiny, boards will need to satisfy themselves that regulations have been adequately embedded within their firms. Firms will need to increase resources dedicated to understanding and responding to supervisory priorities.

Firms should turn their attention to optimising their operational strategy and business model in the new regulatory environment, in order to progress cost reduction targets and enhance customer outcomes.

IBOR transitionView a summary of our predictions for 2019

The pressure to transition away from LIBOR will grow, with greater supervisory scrutiny of whether firms are reducing their dependencies on, and exposures to, LIBOR.

2019 will see an increase in issuances of RFR-linked products, as banks and other market participants start to drive activity in them.

Firms’ management of conduct risk will move up the agenda as supervisors take greater interest in firms’ accountability and oversight, conflicts of interest controls and disclosure practices to manage these risks.

Early in 2019 firms will “wake up” to the risks of a failure to transition away from EONIA, and possibly Euribor, in time.

Even if authorities offer some flexibility in respect of the 1 January 2020 EU BMR deadline for critical and/or non-critical benchmarks (including third-country benchmarks), EU regulators will become more vocal about firms’ transition plans in 2019.

Climate change and sustainabilityView a summary of our predictions for 2019

The prescriptiveness of any EU-wide regulatory actions on a one-two year horizon will depend in part on how well firms engage with voluntary initiatives and demonstrate that they are on top of climate-related financial risks.

Boards will need to review and define the relevant roles and responsibilities for managing financial risks from climate change.

Increasingly banks will integrate climate-related financial risks into their loan origination processes, insurers will introduce more sophisticated modelling of physical risks, and asset managers will treat them as investment risks and influence corporate responses to climate change through board targeting.

Supervisory constants:

Culture and governanceView a summary of our predictions for 2019

In their continued drive to address the root-causes of prudential failure and misconduct, supervisors will focus increasingly on meaningful diversity and inclusion as a way of avoiding groupthink and ensuring adequate challenge within decision-making.

Firms will need to demonstrate that their governance, risk management and control frameworks are sufficiently robust, both to identify emerging risks, and to cope with these and other risks which crystallise.

Boards will be expected to demonstrate that they take culture seriously, that they have defined and communicated their target culture, and that they have incentivised the right behaviours at all levels throughout the firm.

Regulatory appetite for greater board and senior management accountability is growing. Future episodes of misconduct or excessive risk-taking will lead more regulators to pursue measures to achieve this accountability.

Scrutiny of firms' business models to the changing risk environment View a summary of our predictions for 2019

Vulnerabilities are building in the real economy and financial system. Supervisors exploring how these risks might crystallise will challenge firms on a range of “what-if” assumptions, focusing on idiosyncratic risks.

Firms also face several structural risks, including from technological innovation, cyber and climate change. These risks are not new, but in 2019 we expect to see a step-up in activity as supervisors demand evidence of firms taking concrete steps to assess and address the risks.

In light of these developments, firms should review the effectiveness of their risk management frameworks and the quality of their strategic thinking and management. Supervisors will expect to see continuing evidence of firms proactively managing risks to their balance sheets and business models. As well as posing a threat, technological innovation presents an opportunity for firms to enhance their management and monitoring of risks.

Access and vulnerable customersView a summary of our predictions for 2019

As firms’ use of new technologies and digital distribution grows, regulators’ focus on conduct and consumer protection will mean they become increasingly concerned about the potential for these developments to lead to financial exclusion amongst certain consumer groups.

We expect the FCA’s new guidance on vulnerable consumers to provide firms with a steer on how to identify and categorise them based on their different vulnerabilities, and highlight what sort of actions firms can take to ensure they are treated fairly.

A variety of EU supervisors will look to assess firms’ steps to safeguard elderly and vulnerable customers as part of their MIFID II suitability assessments.

Testing for cyber vulnerabilitiesView a summary of our predictions for 2019

Cyber “red-team” testing will become more widespread in 2019, with more jurisdictions beginning to adopt the practice.

The rollout of red team testing in the Eurozone will follow the ECB framework, but national authorities will implement it unevenly across geographies and sectors.

UK authorities will extend their existing CBEST red-team testing programme to a broader group of firms, potentially including more insures and asset managers.
Pressure will grow for more international coordination in the cyber risk testing of financial firms, potentially prompting the G7 to produce high-level principles.

Model risk managementView a summary of our predictions for 2019

Supervisors continue to want firms to improve their understanding of the strengths and weaknesses of models used for regulatory capital calculations and strategic decision making; and the governance and oversight of such models.

Firms will need to demonstrate continuous improvement in senior management and board understanding of models, and ongoing improvements in the processes and teams conducting oversight and challenge of both the models and their outputs.

Firms will need to apply model risk standards, oversight and governance to a broader range of existing financial models such as IFRS 9 and IFRS 17/reserving models, as well as other model-like algorithms and approaches to managing non-financial risks.

Sector-specific issues

Prudential (Banking)View a summary of our predictions for 2019

The EU’s CRD5/CRR2 banking package will be finalised in 2019, clarifying the implementation of many prudential initiatives; progress will be made on plans to complete Basel III in the EU, but legislation will not be proposed until 2020.

Algorithmic and electronic trading (Capital markets)View a summary of our predictions for 2019

We expect algorithmic trading to increase as more trading moves onto venues and firms focus on reducing costs. Given the detailed rules and expected supervisory scrutiny in this area, firms should focus on algorithm governance and controls.

Supervisors will require remediation work on MiFID II transaction reporting in 2019. Effective governance and controls are essential so that as businesses evolve they ensure complete and accurate reporting.

It is almost certain that the FRTB will be implemented in the EU as a reporting requirement first and firms will need to consider what a two-phase FRTB introduction means for their implementation plans.

Business model challenges (Insurance)View a summary of our predictions for 2019

The low interest rate environment and technological innovation will continue as the main business model challenges and drivers of change in the insurance sector.

Supervisors will scrutinise conduct, prudential and systemic, risks heightened by changing activities and sources of profitability for insurers, including shifts into higher risk, less liquid investments and activities.

Changing role of insurers and insurance (Insurance)View a summary of our predictions for 2019

Regulators will develop new policy responses to the changing role of the insurance sector in society in areas such as infrastructure investment, pension and care provision, and releasing housing equity for retirement funding.

Pricing and distribution (Insurance)View a summary of our predictions for 2019

Regulators will scrutinise pricing and distribution, including InsurTech developments, and will materially strengthen their expectations in areas such as price discrimination and cross-subsidy in support of good consumer outcomes.

The Solvency II review will sceptically re-examine the long term guarantees package and the macro-prudential features of Solvency II. In parallel, EIOPA will focus on differences in national implementation and the long-term rationale for maintaining multiple regulatory and valuation bases for insurance.

About the EMEA Centre for Regulatory Strategy

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation.

With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.

You can find more reports like this at Deloitte.co.uk/ECRS, where you can also sign-up for our monthly risk and regulation newsletter.

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